Corporate Bailout: Intentionally Bungled?
By Deb Cupples on December 31, 2008 at 11:10 AM in Banking Institutions, Bush/Cheney, Congress (House & Senate), Current Affairs, Economy, George Bush
Earlier, I posted about how executive pay can drain companies and destroy jobs. Today, I cannot help thinking about how our politicians have committed to funneling billions of tax dollars to some of the same executives who managed to personally enrich themselves while driving their companies (and our economy) into a ditch.
Naturally, this led me to think about one of the big “mistakes” that government officials made when crafting the Wall Street bailout plan: the failure (or refusal) to insist on accountability.
The purpose of this year’s $350 -$700 billion corporate bailout was to unfreeze credit markets by sending cash to banks so they would start lending money again.
Some bailout-fund recipients, however, chose to use the money for purposes other than generating loans. (NY Times) At the end of October, the Associated Press reported:
“[R]eports surfaced that bankers might instead use the [bailout] money to buy other banks, pay dividends, give employees a raise and executives a bonus, or just sit on it.” (AP)
Apparently, companies that received bailout funds were legally allowed to not use those funds to help our nation’s economy by unfreezing credit markets.
Why? Because Congress and the Bush Administration (which includes Treasury Secretary Henry Paulson) either failed or refused to legally require companies that get bailout funds to actually use the money to generate loans.
Setting such a requirement would have been easy: some sentences drafted by staff lawyers at Treasury or Congress were all that was required.
Can we chalk up the bill-drafting failures to human haste or tiredness? Were our government officials simply naive? I doubt it.
Mr. Paulson was CEO of Goldman Sachs before becoming Treasury Secretary in 2006. He is savvy and knows how the folks running the banking firms operate.
Some representatives in Congress might not be the sharpest tools, but they have access to staff lawyers (as do Mr. Paulson and other Bush Administration officials).
Basic principle: if you give a guy money and don’t contractually require him to spend it in certain ways, then he is not required to spend the money in certain ways. Period. End of story. First-year law students understand this principle.
I suspect that officials in Congress and the Bush Administration — including Mr. Paulson — also understand the principle.
The big question: why didn’t they insert into the bailout bill some sentences requiring bailout-fund recipients to spend our tax dollars on generating loans and unfreezing credit markets?
The bailout plan started as a roughly 3-page Treasury Department proposal. If memory serves me, the first House bill (which was voted down) was about 100 pages. The final bill (which was passed) was 451 pages and reportedly chock full of pork or riders.
In short, government officials were very busy adding thousands of sentences to the final bailout bill before both houses of Congress passed it.
If those officials had time and hand-strength to insert 300+ pages of stuff into the bailout bill, then they could have inserted sentences requiring companies that received bailout funds to spend that money on generating loans.
And yet, such sensible sentences are conspicuously absent from the bailout bill — just as absent as are sentences that would have ensured various forms of accountability.
If the omission of such sentences was accidental, then a whole slew of government officials and staffers should be replaced by competent people — and that’s the best-case scenario.
(Release: November 13)
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They should pass a law that allows those greedy bankers to be hung in the street like the worthless stinking traitors they are
Deb,
I feel your frustration and empathise. That said, we addressed the fact that our banking system has such enormous losses currenlty embedded in the system and further enormous losses that will accrue in 2009 that they are forced to increase reserves to cushion against these losses. 25 banks have failed to date and 200 more are on the watch list.
Additionally while the banks are withholding funds the demand for loans is also down. Neither of those situations helps qualified and creditworthy borrowers looking for funds.
The regulators, including Sheila Bair at the FDIC, are encouraging banks to increase reserves vs losses so they do not fail as loans default.
We addressed all these points in “Where’s The Money??” this past Sunday.
LD: can you link to that post? (We addressed all these points in “Where’s The Money??” this past Sunday.) I can’t find it.
Did you address how raises and bonuses are a “cushion against losses?”
Sophie,
Will attach the link to the story. I also encourage you to read the piece “The Wall St. Model is Broken…and Won’t Soon be Fixed” that is included in “Where’s the Money”.
In regard to raises and bonuses,I did not address that in my piece but will offer my opinions here.
Compensation on Wall St. has incentivized people to attempt to book short term gains, which flows through in the form of annual compensation, while not eliminating or mitigating the risks of the transaction. Given that risks remain, compensation should be able to accrue but not be paid until the final profit/loss has been determined.
I do believe that given this fiasco that we will see a system of this sort develop across all of Wall Street.
Who should have mandated this sytem to this point? The boards of these organizations should have collectively agreed to that approach. That may strike some as collusionary but virtually every firm currently pays a large percentage of compensation in the form of stock holdings which vest over a 3 to 5 year time period so employees already do have an interest in the firms long term performance. This comp program does not get much press or publicity because it does not serve the medias purpose. That said, there is even more that should be done to address the situations and transactions that leave significant degrees of residual risk in the firm.
http://www.noquarterusa.net/blog/2008/12/29/wheres-the-money/
http://www.nypost.com/seven/01012009/business/citigroup_finally_joins_the_no_bonus_pos_146723.htm
Looks like Citi will implement a comp system that employs a “clawback” for situations in which residual risk remains within the firm.
I would assume if Citi does this that all the banks will also do the same.
LD,
You make some interesting points. I’ll check out your post from last week.
LD,
I read your post from Sunday. Nice job. It sounds logical, though I’m out of my depth here.
From your explanation, I understand why banks would want to build reserves: I just don’t understand why 100% of the bailout funds should go toward reserves (or toward consolidating financial institutions so that new firms become too big to fail or toward executive compensation, as the AP stated some firms were doing).
It seems likely that there are middle-class people out there with decent and secure jobs (or some accumulated wealth) who would love to get cheaper loans to replace their SUVs with hybrids, cutting their electricity bills by installing solar, or buying new appliances, for example.
Wouldn’t devoting part of the bailout funds to generating loans help unfreeze the credit markets and also help our economy by promoting consumption?
What I’d like to see are some real numbers – which (as you pointed out) the media aren’t sharing or don’t know.
In terms of government accountability, if Congress and the Bush Administration had planned all along to spend tax dollars on building bank reserves (instead of unfreezing credit markets and stimulating consumption), then they should not have sold the bailout to the public based on the notion of unfreezing credit markets.
Deb,
Your points are well taken.
I will respond by stating the following:
1. if they sold it as a recapitalization of the banking system, I think they believe it would have sparked heightened fear and a potential run on banks especially after Indymac failed late this Summer.
2. in terms of lending, I hesitate to continue to refer back to other pieces (especially a lengthy one) bit my piece from November 12th which is actually linked in “Where’s The Money??” addresses this fact. Banks developed an “originate to distribute” lending model. As investors totally backed away from purchasing these loans and actually sold a lot of loans that were previously originated and purchased by the rates for loans ratcheted higher very quickly. Given that banks now have to originate for portfolio purposes not for distribution purposes, the price and availability of credit is totally readjusted.
Not pleasant but that’s the reality.
As I mention in my piece, I do believe that November 12th piece is as descriptive and detailed as anything I have seen in the media or web in highlighting what has occurred on Wall St. and providing a historical perspective as well.
If you care feel free to post it on your site.
Pleasure chatting. I welcome trying to offer further insight if you’d like.
I do not pretend to have all the answers but having worked on Wall St. for the better part of 25yrs I am happy to share my insights.
I’m on my way to finding your Nov. 12 post. Thanks.
Still, you’d think that they wouldn’t put it ALL into reserves. Aren’t these the very people who tell US how shortsighted (and fruitless) it is to stuff our money into mattresses? Isn’t this the corporate equivalent of stuffing money in a mattress?
Money is fungible so it is impossible to know how much is reserved and how much is being allocated.
Suffice it to say that the system as a whole needs to be recapitalized and that revenues generated during 2009 will be used to offset losses.
This massive capital injection is truly being used in an attempt to buy time.
Yep and they are the very same people who blame mortgage brokers for this mess..mortgage brokers don’t make the rules, they only follow the lender guidelines.
The one with the money makes the rules.
And you articulate it so well LD. There is so much to go over that it’s difficult to piece it all together.
it had to go to reserves almost exclusively because of the dire nature of the banks’ balance sheets – they needed almost all of the money just to get to a so-so position vis a vi reserves.
Sad, but true.
Earlier, I posted about how executive pay can drain companies and destroy jobs.
………….
They also need to address those greedy executives that drained the life out of the retirement funds via their executive pay. The fact that Senators like Biden can stay in there for 26+ years is indicative of the entrenched, “We will fix it” and they never do, but they enjoy PLUSH RETIREMENTS AND HEALTH CARE!
If they had to run a business and make payroll then maybe they wouldn’t let this nonsense go on.
It’s time for term limits. If they can’t get it done in three terms then out! They are the BIGGEST PART of the problem.
I believe that we should hold all those who votes YES to giove those corrupted sons of… 700 billions plus more billions in PORK PROGRAMS. McCain and Obama voted YES!!!!
Obama did support this, and He is just as responsible for stealing from US, as Congress and House are.
Wake the hell up, America!
A chorus of memories to usher in the new year:
I’m mad as hell, and I’m not going to take it anymore!
Hope and Change!
Here he comes to save the day!
We are the ones we’ve been waiting for!
There’s supposed to be a big celebration tonight, but I’m really tired and sleepy.
Two new year’s resolutions: 1–I’m going to get rid of things. 2–I’m going to put much of what I have in boxes to make it easier to move.
I agree, we all need to wake up, we are over the cliff hanging on to a tree limb.
NO, Americans will say” we must pay. Recently Obama told US, that OIL will go UP, when He become to Be President. We will be screw up again, because no one has guts to stop this MEDNESS!!! NO ONE IS DEMENDING PUBLICLY TO GET THOSE WHO ARE RESPONSIBLE AND CLEAN THEM UP!!!. tHEY ARE LAUGHING AT us ALL THOSE ceo’S, ALL banks,mortgage comp. Wall Street has to much power!!!300 millions laying flat before 435 Congress people and 100 Senat thiefs!!! and the White House!!! Americans have no guts to stand up against illegal immigration, corrupted politicians,and much more. We are jast as responsible for this mess, because we are not doing anything to stop them, and WE are voting for those like Reid,Pelosi, instead stop voting for them and all like them TERM LIMIT IS A MUST !!!Republicans and Democrats are steeling from US 24/7, and we let them do it.
Amen Texas Playwright!
” Basic principle: if you give a guy money and don’t contractually require him to spend it in certain ways, then he is not required to spend the money in certain ways. Period. End of story. First-year law students understand this principle. ”
You’re much too nice. Mommie understands this when she hands her child lunch money. Once an adult, lack of understanding in this area requires permanent brain damage.
The problem is, Mommie is handing the paramour else’s money, not hers, and she stands to gain plenty, personally.
this might also help Americans understand what is going on….
http://logisticsmonster.com/2008/12/31/americas-economic-collapse-an-intricate-web-of-money-power-and-political-agendas-part-i/
thanks for letting me drop the link!
@Deb Cupples and LD —neat exchange up thread. Thanks.
Officials:traking bailout money is difficult
“The information was contained in a document, released Wednesday, of a Dec. 10 meeting of the Financial Stability Oversight Board. The panel, headed by FED chairman Ben Bernanke, includes Tresuray Secretary and SEC chief Christoper Cox.”
Financial Stability Oversight Board???
Love the minutes of the meeting they had back in October…seems like so long ago.
The first meeting of the Congressional Oversight Panel was held Wednesday, November 25.
One of the reasons for the difficulty, it appears, is that the people in charge are slow on their feet and the meter is running like a taxi at a “house of blue lights”.
Is there no end to the largesse?
Is there no end to the largesse?
There is an end. It comes when the bailout gets to the working stiffs. No bailout for you. “Wha’ are ya a commie? Think there’s a free lunch?” Just the other day some congress-critter was saying they couldn’t give money to ordinary Americans because they’d just use it to pay off their debts… sort of like the banks are doing…
Happy New Year, Kite!
Happy New Year back at ya Anne Oakley,
Keep the pistols clean k?
Since late 2006
312major U.S. lending operations have died.
I tried to post a list of them all but it went to spam 3 times.
The Treasury Department has committed nearly $10 billion more than the $350 billion Congress has authorized to date for the financial-sector rescue package, which could constrain how the incoming Obama administration deploys the rest of the fund.
People who are using pawn shops pull up in Cadillacs and BMW’s
CNBC yesterday who attempted to propagandize for the bailout by pushing the idea that it was necessary and inevitable.
Schiff pointed out that the word “stimulus” was a misnomer because the government has proven itself incapable of stimulating the economy and has only sought to “interfere with the free market’s ability to create legitimate wealth,” a process that would lead to more inflation and more destruction.
http://www.youtube.com/watch?v=E-uoFxxCCMo&eurl
Dow falls 3.9% in DEC.
http://www.youtube.com/watch?v=YIC7ufXH-G0&eurl
Rolling…at today’s close the DJIA was actually only down .6 for the month. It was down 34% for the entire year!! The market rallied fairly significantly the last two days. App 3.2%.
At least 108 Hedge funds at 66 outfits have Failed.
If you only knew the half of it. MSM isn’t saying because MSM doesn’t know. Plus, nObama has been in bed with the likes of Credit Suisse since at least 2004. Big time player with big time fees..getting stinking rich..
They failed a while back but these crooks have a way of coming back from the dead with their rotting corpses to try and get some TARP money for their extavagant lifestyles at the expense of the borrower. Sell your books, CD’s and whatever else. We are at the top of the roller coaster and heading down.
Thanks for this post, and please keep asking questions and speaking out on this. Most people, including congress, are easily cowed on this topic because it is so complex. LD is providing a valuable source for information, so the following criticism is not aimed at him.
The Fed has used the public’s and congress’s lack of knowledge about finance as a way to silence its critics. William Greider wrote a book about the Fed called Secrets of the Temple which documents the Fed’s handling of a similar financial crisis in the early 80s as well as some history of the Fed. Two of the ideas in his book are that in a democracy’s finance, all people have the right to know what’s being done, who benefits and who pays. Secondly, finance is political. There is no great Rule Book for the Fed to follow, and they have been proven wrong frequently. But they make monetary decisions in favor of the financial class and at the expense of ordinary citizens. An informed citizenry can push back against the big banks – and used to.
So please keep speaking out on this important topic. Only Bernanke’s or Paulson’s view doesn’t tell the whole story.
Annie,
We are aligned here. I hope that through increased sharing of info and dialogue here at NQ that people will become more informed as well. In so doing they can act and react accordingly.
Thanks for sharing.